A petroleum company wants you to evaluate the economics ofabandoning a stripper oil well versus sell

A petroleum company wants you to evaluate the economics ofabandoning a stripper oil well versus selling the well to aninterested investor. If the well is abandoned, a $25,000abandonment cost must be incurred now (year 0) and a salvage valueof $40,000 will be realized on the used producing equipment. $7,500of book value remains on the producing equipment and will bewritten-off against the salvage value or other income at year 0 ifthe well is sold or abandoned. Assume other income exists againstwhich to use deductions. The effective ordinary income tax rate isassumed to be 40%. Calculate the stripper well selling price thatwill make the economics of selling at year 0 a break-even withabandonment at year 0.

 

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